Monthly Markets Review – May 2020

A review of markets in May when shares were supported by an increasing focus on how lockdowns would be lifted.

  • Equity markets rose on the whole in May as Covid-19 lockdown measures began to be lifted and further support measures were announced. Escalating tensions between the US and China, however, limited emerging market equity gains.
  • US shares gained ground amid optimism over the re-opening of the economy. Q1 GDP growth was revised down to -5.0%, compared to the first estimate of -4.8%.
  • Eurozone equities advanced as some countries began to allow some parts of their economies to reopen. The European Commission proposed a €750 billion recovery package.
  • UK equities rose in May. A number of economically sensitive areas performed well amid the improvement in investor sentiment. Sterling fell as worries over a no-deal Brexit resurfaced.
  • Japanese shares posted gains, with pharmaceutical stocks leading the advance. Lockdowns across the country were lifted in stages during the month.
  • Emerging market (EM) equities advanced but underperformed developed markets. Performance was dampened by the re-emergence of US-China tensions.
  • Corporate bonds outperformed government bonds as the more optimistic backdrop saw investors favour higher risk assets. US 10-year government bond yields were little changed during the month.

Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.


US equities gained in May, with investors cheered by plans to ease the Covid-19 lockdown measures both domestically and in many countries around the world. Every US state had made plans to reduce restrictions by mid-May. The US dollar fell, becoming less attractive as a safe haven as risk appetites climbed. The rise in optimism came in spite of the confirmation that the economy had contracted by slightly more than expected in Q1.

Real GDP for Q1 was revised down to an annual rate of -5.0%, a bigger decline than the 4.8% drop first estimated. It was the biggest quarterly drop since an 8.4% fall in Q4 2008. Much of the weakness was due to a sharp fall in consumer spending, especially in consumer purchases of services. In addition, there were some concerns that the US-China trade relationship could sour again. However, neither issue managed to recapture investor focus, which landed on economies restarting around the world.

US equities rose in line with other world equity indices. All sectors in the S&P 500 rose with materials and industrials, more cyclically-exposed, performing strongly. IT stocks were once again notable outperformers. Consumer staples and energy lagged behind the wider market but still made positive progress.


It was another month of gains for eurozone shares in May as many European countries began to ease out of lockdown. Stock markets were further supported by news of the EU’s plans for post-coronavirus recovery.

European Commission president Ursula von der Leyen called for the power to borrow €750 billion for a recovery fund to support those EU regions that have been worst affected by Covid-19. This would be in addition to the €540 billion rescue package agreed in April. She also proposed a new suite of taxes to pay back the debt. The plan still needs the approval of member states, with the recovery fund expected to be on the agenda for the 19 June European Council summit. In addition, comments from European Central Bank (ECB) board members suggested that the ECB’s asset purchase target could be increased at the June meeting.

All sectors saw positive returns with gains for both economically-sensitive sectors and those perceived to be more defensive. The industrials and utilities sectors were among the top gainers while energy and consumer staples saw a smaller advance. Forward-looking economic data showed how activity is picking up as lockdowns started to be relaxed: the Markit composite purchasing managers’ index (PMI – a survey of companies in the manufacturing and service sectors) rose to 30.5 in May from 13.6 in April. However, this is still well below the 50 mark that separates expansion from contraction.


UK equities rose over the period. A number of economically-sensitive areas of the market outperformed amid the general improvement in investor sentiment. The mining sector performed particularly well in response to a recovery in Chinese industrial activity.

The government began to ease lockdown measures with people encouraged to return to work where possible and a phased reopening of the retail industry and schools confirmed. Meanwhile, the UK’s departure from the EU returned to the agenda as the end of June deadline to extend the Brexit transition period, which expires on 31 December 2020, came into view.

Renewed concerns that the country could be heading for a “no deal” Brexit weighed on sterling, as did the prospect of negative interest rates. The Bank of England governor told parliamentarians that negative rates were under “active review” while the Debt Management Office confirmed it had sold negative yielding gilts for the first time.

The Office for National Statistics reported that the UK economy had contracted by 2% in Q1 2020 as lockdowns in response to the Covid-19 pandemic took their toll on activity towards the end of Q1. The preliminary estimate was less negative than consensus estimates, though it does represent the largest fall in GDP since the fourth quarter of 2009 and the global financial crisis.


The Japanese market rose steadily for most of May to end with a positive total return of 6.8%. The yen was quite stable, weakening just marginally against the US dollar during the month.

Equity investors globally have responded to an assumed reopening of economic activity, although the actual path for any return to a more normal environment for corporate earnings remains very uncertain. The Japanese market was led up in May by pharmaceuticals. There was a brief recovery for some financial stocks, including leasing companies, together with airlines, which have been among the hardest hit sectors throughout this crisis. Small caps also performed relatively well and have now recouped almost all of the underperformance seen from January to mid-March.

The results season concluded for the fiscal year, which ended in March. Investors have naturally focused more on the outlook than the historical results, but only a minority of companies have provided any guidance for the fiscal year to March 2021. 

Japan’s statistics on both the infection rate and the mortality rate from coronavirus remain significantly better than most other developed economies. The population seems to believe this is more by luck than judgement on the part of the government: the public’s approval rating of Abe’s administration has fallen to its lowest levels since he became prime minister at the end of 2012. Nevertheless, the prime minister was able to announce a staged lifting of the state of emergency, starting from 14 May for some prefectures and culminating on 25 May for Tokyo. Abe’s cabinet drew up a second supplementary budget in May, as expected.

Asia (ex Japan)

Asia ex Japan equities bucked May’s global market trend by posting a loss.  Hong Kong, where a new national security law was proposed, was the worst-performing market in the region. The other Greater China markets of China and Taiwan also posted losses as Beijing’s relationship with the US became strained once again amid talk of delisting Chinese companies from US markets and imposing compensatory tariffs for Covid-19.

Elsewhere, India, where the financial sector was as drag, also posted a loss, so too did Singapore. Meanwhile, a better-than-expected earnings season boosted the Korean market, while the ASEAN (Association of Southeast Asian Nations) markets of Thailand and Malaysia also posted strong gains. Across the region, the worst-performing sectors were real estate and financials, while healthcare and consumer discretionary outperformed.

Emerging markets

Emerging market (EM) equities registered a positive return in May, as lockdowns began to ease worldwide, although performance was dampened by the re-emergence of US-China tensions.

Argentina was the best-performing index market. Brazil, where the central bank promised to intervene to support the currency if necessary, and Russia, aided by currency strength and a rally in crude oil prices, also outperformed.

Chile and Egypt, which sought additional support from the International Monetary Fund (IMF), were the weakest index markets. China also lagged behind as the intensifying US-China confrontation expanded beyond trade and technology issues to broader geopolitical tensions and China moved to impose a national security law on Hong Kong.  

Global bonds

Investor optimism grew over the month, with riskier assets performing well. The rate of new Covid-19 infections continued to moderate and various countries started to ease lockdown measures.

Central banks gave assurances that support would continue and, in Europe, there was progress towards a co-ordinated agreement on fiscal support measures. Economic activity data showed some improvement, with higher frequency indicators suggesting the situation is less dire than widely feared. These factors outweighed concerns over renewed tensions between the US and China.

The 10-year US Treasury yield was little changed at 0.65%, trading in a relatively tight range throughout the month. The two-year yield finished slightly lower.

In comparison, European government yields saw meaningful moves, reflecting developments around potential fiscal support. Germany’s 10-year yield rose from -0.59% to -0.45%, while Italy’s fell from 1.76% to 1.49%. The Spanish 10-year yield fell from 0.73% to 0.57%.

The UK 10-year yield was slightly lower, from 0.23% to 0.18%, while sterling weakened. UK yields fell below zero in shorter maturities, reacting to speculation that the Bank of England might be considering employing negative interest rates. The UK’s two-year gilt yield fell from 0.01% to -0.04%.

Corporate bonds outperformed government bonds, with global high yield (HY) returning 4.5% (source: BofAML, local currency) amid stronger demand for riskier assets. The spread on HY (the difference in the yield of a corporate bond versus a similar maturity government bond) tightened by 107 basis points (bps). Investment grade saw total returns of 1.3% (source: BofAML, local currency). Across both, positive performance was driven predominantly by cyclical sectors, which continued to recover ground. Investment grade bonds are the highest quality bonds, as determined by a credit ratings agency, while high yield bonds are more speculative, with a credit rating below investment grade.

The increased demand for riskier assets also led to positive returns for emerging markets bonds and currencies, led by higher yielding markets. Currencies of oil exporters made gains as oil prices recovered. The Mexican peso and Russian rouble were among the strongest performers.

The overall MSCI equity index returned 4.5% in May. Convertible bonds as measured by the Thomson Reuters Global Focus Index, outperformed stocks with a gain of 5.4%. There was a record volume of new issues with $26 billion of new paper which kept valuations low.


There was a bounce-back in commodities markets in May. This was led by oil as Brent rose by 40% amid a loosening of lockdown measures in many countries. Precious metals, led by silver (+19.3%), and industrial metals, led by iron ore (+10%), also gained.

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

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